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Oklahoma Oil Industry About To Lose Tax Rebates

Oklahoma oil rig

The Oklahoma Senate has suspended a tax incentive for the oil industry that’s likely to see a lot of small producers go under.

Oklahoma is facing a budget shortfall of U.S. $1.3 billion this year, not least because of a special tax break for the oil industry. The incentive, in the form of tax rebates for oil wells that are economically at risk, was introduced in 2005 to provide small, mom-and-pop type oil producers with a means of survival in times of low prices. Unfortunately, the bill for the state has swelled so much that it can no longer afford to keep this up.

The at-risk well rebate amounts to six-sevenths of the 7 percent tax that oil producers pay on their wells. But not all wells in Oklahoma are taxed at 7 percent. The tax applies to old vertical wells (around half of all operating wells in the state) and will apply to horizontal wells in a couple of years, when the tax rate for horizontals will automatically jump from 1-2 percent to 7 percent. Related: Oil Price Spike Is Not As Far Away As Many Think

In 2013, the overall rebates for the operators of at-risk oil wells totaled $11 million. The sum for 2015, which is to be paid this year, is estimated at $133 million. Next year, estimates of the Oklahoma Tax Commission show that the state would have had to pay $158 million in rebates. But this is not going to happen.

The state senate just passed a bill that scraps the tax incentive, despite calls from the local oil industry association, which is seeking a cap on the amount instead. The Oklahoma Independent Petroleum Association argued that limiting the amount of rebates to $25 million would be a sensible compromise that both the state budget and the industry will benefit from. However, apparently the senate did not share that opinion. Related:Why Jim Chanos is Shorting the Oil Majors

One of the authors of the bill, Brian Bingman, said, “That's our main responsibility, funding government properly. So let’s make sure everyone shares in the pain that we're going through this year,” adding that his next target is the wind industry.

The move will most likely force a lot of small producers to idle most or all of their wells: at current crude oil price levels, these wells will be not just at risk, they will be clearly unprofitable. Although oil is a vital industry for Oklahoma, in this price environment, supporting it has turned into an unbearable burden.

By Irina Slav for Oilprice.com

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  • Mchentrp on May 17 2016 said:
    So here's how it works: instead of getting six percent net of the rebate, they'll get nothing so that loss of revenue will be larger than the increase. It appears to me that they would be better off in the long run if they start policing the claims that have led to such a huge increase in rebates.
  • Scott Beaty on May 18 2016 said:
    Once again Oklahoma senators prove that they are pro-oil industry...until they're not...
  • Bob on May 18 2016 said:
    Seems like a lot of potential worries for OK producers. Another one with possibly significant ramifications is the earthquake related stuff. I guess already there are new regs related to waste water, which, not surprisingly, are seemingly being ignored by producers by some news reports.

    But the greater issue might be the insurance ramifications. Reports indicate earthquake coverage, at least good coverage, in OK is getting scarce. Plus, insurance companies are hinting they might want to go after producers to recoup damages.

    I guess OK producers are certainly living in interesting times.
  • Red Archer on May 18 2016 said:
    So if I operate a 1,000 wells, that provide hundreds of jobs and those wells barely break even, they will now lose a lot of money. So I will have no choice but to plug them. Now all those people lose their jobs and quit paying taxes. The landowners quit getting their monthly check. They cut their spending & more people lose their jobs.

    Since the well is plugged the government gets 100% of nothing, plus loses out on all the other taxes created by the workers & landowners etc.

    Tax rebates aren't spending when you wouldn't get the taxes because the wells will stop producing.

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